Reckon you could run the federal government’s budget? Would you balance the books, stop the reckless spending and pay off the debt? Think again. Government budgets are not like household budgets. If you could run your household budget under the same conditions that apply to government budgets, you would face several advantages.
First, you would never die. Individuals die, but governments keep on keeping on. This means that unlike us, a government will never face a day of reckoning when it closes accounts and has to hope that its assets outweigh its debts and it does not pass on debt to its children.
Second, you would never lose your job. The main risk for households with debt is that they lose their income and are unable to service debt repayments. The good news for governments is that their income comes from the labours of others, including wages and company profits.
Collections can rise and fall, but they never disappear entirely, barring some apocalypse.
Third, you would be able to demand a pay rise whenever you wanted. With its powers of taxation, governments can at any point legislate to raise existing taxes or create entirely new ones to cover the debt repayments. Nifty, huh?
Fourth, if the economy hit financial turbulence, banks would literally beat a path to your door trying to offer you really cheap credit. On Wednesday, the Australian government’s debt manager secured a $700 million loan at an interest rate of just 4.4 per cent. Compare this with the average standard variable interest rate of 7.8 per cent paid by mortgage holders.
Debt is even cheaper for the US government, which at one point this week was paying less than 2 per cent on its 10-year debt, the lowest since 1954. In Britain, the interest rate payable on the government’s 10-year gilts (bonds) fell to 2.24 per cent, the lowest since Queen Victoria’s reign in the 1890s.
In times of turmoil, investors seek the safe haven of government bonds. Facing few alternative avenues for profitable investment, they are happy to accept a relatively small return from the government. Of course, governments with poorly run finances, such as Greece, must pay a higher rate of interest to secure loans, about 16 per cent at present.
Almost all economists agree it is desirable in the long run for governments to spend roughly what they earn. This acts as an important restraint on politicians, who would otherwise spend the world and slash taxes to win elections.
But in the shorter term, it can be bad for governments to seek to balance the books during an economic downturn.
Good governments run what economists call “counter-cyclical fiscal policy”. That is, they spend against the grain of the business cycle. When times are tough, the government spends money to stimulate growth. When times are good, they squirrel money away to save for a rainy day and keep pressure off inflation.
Of course, this often fails because politicians much prefer spending money to saving it. But the time to fix the fiscal roof is when the sun is shining, not in the pouring rain.
Remember that the next time you hear some opposition politician lecturing about the evils of government debt.
THE IRVINE INDEX
Value of all Australian outstanding loans for owner-occupied and investment housing.
Average standard variable mortgage interest rate from the banks.
United States government net debt as a percentage of its GDP this year.
Predicted peak in Australian government net debt this financial year.
Interest rate that the US Treasury is paying on its long-term debt, the lowest since 1954.
Australian government net debt as a percentage of gross domestic product.
Greek government net debt as a percentage of GDP.
Interest the Australian government pays on its long-term debt.
Interest paid by the Greek government on its long-term debt.
Sources: rba.gov.au, budget.gov.au, aofm.gov.au, imf.org